Hipgnosis Songs 18 February 2022

Hipgnosis Songs (SONG) stole a significant lead over many corporates and private equity fund managers, having in 2018 created a new category of listed fund to invest in songwriter royalties. As was their aim at the start, SONG’s manager has built a large portfolio of songs, many of which are of ‘great cultural importance’. SONG now has a portfolio ‘fair value’ of c. £2.5bn, comprising 146 Catalogues and 65,413 Songs. With every significant acquisition made by SONG, by the manager’s new partner Blackstone or by other private equity or record labels, it is arguably becoming increasingly recognised as an alternative asset class.

SONG’s manager aims to provide total returns over the medium to long term of greater than 10%, with a high dividend yield and the prospect of capital growth. Underlying performance over the six months to 30/09/2021 saw NAV total returns of 4.63%, taking the NAV total return since IPO to 46.7%. SONG has performed strongly in absolute and relative terms.

Whilst income over the six months to 30/09/2021 has been affected by a fall in performance income, this was felt most in the younger catalogues. Older, more evergreen catalogues nearly made up for the fall in performance earnings with strong streaming earnings. Overall, catalogue revenues have fallen, but the dividend is still covered (see Dividend).

SONG’s success has allowed some significant senior management hires. The resulting breadth and depth of management resources, not to mention the partnership with Blackstone, should enable more active and successful management. The team continue to highlight synchronisation wins as evidence of added value. Over the past 18 months, synchronisation income has increased from 9% (12 months to 31/03/2020) to 16% of revenues (six months to 30/09/2021).

SONG’s board have committed not to issue further shares until after the publication of the March 2022 NAV (expected in June or July). With the gearing facility largely drawn down, we, therefore expect that the portfolio will remain relatively static until then.

Now a significant and impressive portfolio has been built up, the managers have a clear opportunity to sweat the portfolio and drive returns for shareholders. As we discuss in Performance, we believe that growth in music industry revenues from streaming, a higher share of royalties being paid to writers, active management from the Hipgnosis team, and valuation increases if the discount rate falls from the current rate of 8.5% are all potential sources of future NAV returns.

Whilst this remains a specialist area of investment and therefore does represent something of a leap of faith for generalist investors, the current discount to NAV of 7.5% perhaps provides something of a margin of safety. We believe it is notable that the NAV has generally shown low correlation to equity markets. More latterly, SONG’s shares have provided a degree of insulation to market volatility, but the discount has widened. We identify potential catalysts that might lead to a re-rating in Discount. This may offer an opportunity for investors willing to embrace this new alternative investment area. The recent partnership with Blackstone further supports the argument that this is an area of investment that is set to become more mainstream.